Monthly Archives: July 2017

Black Earth Farming merger arbitrage update

I wrote about the Black Earth Farming merger slash liquidation in April. At that time the company expected to distribute between $185 and $193 million to shareholders at the end of June. Due to some delays in regulatory approvals that date has been pushed backwards to early September, and the amount of the distribution has been adjusted downwards as well. Shareholders are now expected to receive between $180 and $182 million which translates to SEK 6.68 and SEK 6.76/share, significantly lower than the initial company estimate that was between SEK 7.2 and SEK 7.5/share. In dollars the new estimate is just marginally lower than the bottom of the old range, but in Swedish krona the difference is a lot bigger so it seems that the biggest reason is simply a change in exchange rates (even though the company was partially hedged). Other contributing factors were lower crop prices, and some additional money that is being retained to fund litigation in the US.

I exited my position in Black Earth Farming a couple of weeks ago, because the spread at that time was negative if you would take into account the change in exchange rates. With the stock now trading at SEK 6.50 the merger is once again becoming marginally attractive. It’s a spread of just 2.8% compared to the bottom of the estimated range, but with the payment expected to arrive the 6th of September the annualized return of a long position is pretty solid 23%. With no real risks remaining I think that that is not bad, so I initiated a small position again today.


Author is long Black Earth Farming again

Half-year portfolio review, 2017 edition

With the first half of 2017 behind us it is once again time for the obligatory performance review. As can be seen in the table below my performance was more than satisfactory. While the benchmark eked out a small gain of 3.09% my portfolio returned almost seven times as much. I think by now I can be pretty confident that I have some edge on the market, although it remains to be seen how big it is. In almost every past performance review I have written that I don’t expect that I’ll be able to continue to repeat these returns going forward, and I still think that is the case. But who knows. Maybe, just maybe, I can keep this going for a couple of more years.

Year Return* Benchmark** Difference
2012 18.53% 14.34% 4.19%
2013 53.04% 17.49% 35.55%
2014 27.72% 18.61% 9.11%
2015 20.23% 8.76% 11.47%
2016 43.58% 11.09% 32.49%
2017-H1 20.46% 3.09% 17.37%
Cumulative 381.77% 98.46% 283.31%
CAGR 33.09% 13.27% 19.82%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

While my result for the first half of 2017 is pretty good I’m actually not that happy about it. I have reflected a bit upon why that is the case, and I think it’s because the good performance is mainly driven by just a couple of lucky outliers while I also had plenty of idea’s this year that didn’t work out or had a lot more potential than what I realized. It’s not very visible in the graph below because most of the variance is hidden in the “special situations” bucket, but Sapec is for example responsible for 795bps of the performance while “undisclosed merger A” added another 454bps. While Sapec was a great idea, the fact that I was able to buy a large position at almost the low of the day after the going private transaction was announced was just luck. That luck is partially being offset by other trades such as Destination Maternity (my biggest loser with a minus 172bps contribution) while “undisclosed merger B and C” subtracted respectively 152bps and 52bps from the result. I’m often attracted to deals where it is hard or impossible to hedge out company specific risk, and as a result I will have to accept some variance.Also very visible is that in the first half of this year my portfolio faced a large headwind from currency movements, mainly caused by the US dollar losing value versus the euro. In previous years this movement was often in the other direction, and I expect that in the long run these gains and losses will roughly even out. The MSCI ACWI benchmark faced a similar currency headwind. It was up 8.95% in local currency, but just 3.09% in euro’s. While I don’t really own any stocks that are part of that index this is one of the reasons why it’s still a useful comparison.

As you can see my portfolio is in broad strokes looking like it usually does with a large allocation to various special situations complemented with a few dozen value stocks. New is the large position labeled “various receivables”. I often participate in special situations that result in a cash outflow while my broker doesn’t recognize the asset that I receive. If the cash outflow is small relative to my portfolio I usually just value these assets at zero, but for larger transactions it would skew my results too much. A large part of these receivables are the tax assets created in the Sapec transaction, but they also contain the DNIB Unwind (liquidation trust) shares at cost and the remaining Primo Water shares held in escrow at market value.

Another change that warrants a mention is that I finally sold my position in Berkshire Hathaway this year. I bought my first shares in 2010, and since then the stock has performed pretty well. At the same time, I don’t expect miracles from it and it’s probably going to perform roughly in line with the US stock market. Since I had more ideas than money on multiple occasions this year I thought it was a good time to say goodbye to this stock.


Author is long everything in the portfolio overview